This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Quantifying and sustaining welfare gains from monetary commitment

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Paul Levine () (Department of Economics, University of Surrey, Guildford, Surrey, GU2 7XH, United Kingdom.)
Peter McAdam () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Joseph Pearlman () (London Metropolitan University, 31 Jewry Street, London, EC3N 2EY, United Kingdom.)

Additional information is available for the following registered author(s):

Abstract

The objectives of this paper are - first, to quantify the stabilization welfare gains from commitment; second, to examine how commitment to an optimal rule can be sustained as an equilibrium and third, to find a simple interest rate rule that closely approximates the optimal commitment one. We utilize an influential empirical micro-founded DSGE model, the euro area model of Smets and Wouters (2003), and a quadratic approximation of the representative household’s utility as the welfare criterion. Importantly, we impose the effect of a nominal interest rate zero lower bound. In contrast with previous studies, we find significant stabilization gains from commitment - our central estimate is a 0.4 ? 0.5% equivalent permanent increase in consumption, but in a variant with a higher degree of price stickiness, gains of over 2% are found. We also find that a simple optimized commitment rule with the nominal interest rate responding to current inflation and the real wage closely mimics the optimal rule. JEL Classification: E52, E37, E58.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp709.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by European Central Bank in its series Working Paper Series with number 709.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 68 pages
Date of creation: Jan 2007
Date of revision:
Handle: RePEc:ecb:ecbwps:20070709

Contact details of provider:
Postal: Postfach 16 03 19, Frankfurt am Main, Germany
Phone: +49 69 1344 0
Fax: +49 69 1344 6000
Web page: http://www.ecb.europa.eu/home/html/index.en.html
More information through EDIRC

Order Information:
Postal: Press and Information Division, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany
Email:

For technical questions regarding this item, or to correct its listing, contact: (Official Publications).

Related research
Keywords: Monetary rules; commitment; discretion; welfare gains.;

Other versions of this item:

This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Alexei Onatski & Noah Williams, 2004. "Empirical and policy performance of a forward-looking monetary model," Proceedings, Federal Reserve Bank of San Francisco, issue Mar. [Downloadable!]
  2. Nicoletta Batini & Alejandro Justiniano & Paul Levine & Joseph Pearlman, 2004. "Robust Inflation-Forecast-Based Rules to Shield against Indeterminacy," Department of Economics Discussion Papers 0804, Department of Economics, University of Surrey. [Downloadable!]
    Other versions:
  3. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
    Other versions:
  4. Paul Levine & Joseph Pearlman & Richard Pierse, 2006. "Linear-Quadratic Approximation, Efficiency and Target-Implementability," Computing in Economics and Finance 2006 441, Society for Computational Economics. [Downloadable!]
  5. Coenen, Günter & Wieland, Volker, 2003. "The Zero-Interest Rate Bound and the Role of the Exchange Rate for Monetary Policy in Japan," CEPR Discussion Papers 3895, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2005. "Bayesian Estimation of an Open Economy DSGE Model with Incomplete Pass-Through," Working Paper Series 179, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
    Other versions:
  7. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March. [Downloadable!] (restricted)
  8. Barro, Robert J., 1986. "Reputation in a model of monetary policy with incomplete information," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 3-20, January. [Downloadable!] (restricted)
    Other versions:
  9. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608.
  10. ALISTAIR DIEPPE & KEITH KÜSTER & PETER McADAM, 2005. "Optimal Monetary Policy Rules for the Euro Area: An Analysis Using the Area Wide Model," Journal of Common Market Studies, Blackwell Publishing, vol. 43(3), pages 507-537, 09. [Downloadable!] (restricted)
    Other versions:
  11. Dennis, Richard & Soderstrom, Ulf, 2006. "How Important Is Precommitment for Monetary Policy?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 847-872, June. [Downloadable!] (restricted)
    Other versions:
  12. Bennett T. McCallum & Edward Nelson, 2004. "Timeless perspective vs. discretionary monetary policy in forward-looking models," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 43-56. [Downloadable!]
    Other versions:
  13. Michel Juillard & Philippe Karam & Douglas Laxton & Paolo Pesenti, 2006. "Welfare-based monetary policy rules in an estimated DSGE model of the US economy," Working Paper Series 613, European Central Bank. [Downloadable!]
  14. Ehrmann, M. & Smets, F., 2001. "Uncertain Potential Output: Implications for Monetary Policy," Papers 59, Quebec a Montreal - Recherche en gestion.
    Other versions:
  15. Günter Coenen & Peter McAdam & Roland Straub, 2007. "Tax reform and labour-market performance in the euro area - a simulation-based analysis using the New Area-Wide Model," Working Paper Series 747, European Central Bank. [Downloadable!]
    Other versions:
  16. Eggertsson, Gauti B., 2006. "The Deflation Bias and Committing to Being Irresponsible," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(2), pages 283-321, March. [Downloadable!] (restricted)
  17. Adam, Klaus & Billi, Roberto M., 2007. "Discretionary monetary policy and the zero lower bound on nominal interest rates," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 728-752, April. [Downloadable!] (restricted)
    Other versions:
  18. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June. [Downloadable!] (restricted)
  19. repec:cup:cbooks:9780521441964 is not listed on IDEAS
  20. Choudhary, M. Ali & Levine, Paul, 2006. "Idle worship," Economics Letters, Elsevier, vol. 90(1), pages 77-83, January. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Paul Levine & Joseph Pearlman & Peter Welz, 2008. "Robust Inflation-Targeting Rules and the Gains from International Policy Coordination," Department of Economics Discussion Papers 0208, Department of Economics, University of Surrey. [Downloadable!]
  2. Richard Morris & Ludger Schuknecht, 2007. "Structural balances and revenue windfalls - the role of asset prices revisited," Working Paper Series 737, European Central Bank. [Downloadable!]
  3. Simone Manganelli & Guido Wolswijk, 2007. "Market discipline, financial integration and fiscal rules - what drives spreads in the euro area government bond market?," Working Paper Series 745, European Central Bank. [Downloadable!]
  4. Nicoletta Batini & Paul Levine & Joseph Pearlman, 2007. "Monetary Rules in Emerging Economies with Financial Market Imperfections," NBER Chapters, in: International Dimensions of Monetary Policy National Bureau of Economic Research, Inc. [Downloadable!]
    Other versions:
  5. Julian von Landesberger, 2007. "Sectoral money demand models for the euro area based on a common set of determinants," Working Paper Series 741, European Central Bank. [Downloadable!]
  6. Nicoletta Batini & Paul Levine & Joseph Pearlman, 2009. "Monetary and Fiscal Rules in an Emerging Small Open Economy," IMF Working Papers 09/22, International Monetary Fund. [Downloadable!]
  7. Erwan Gautier & Ignacio Hernando & Philip Vermeulen & Daniel Dias & Maarten Dossche & Roberto Sabbatini & Harald Stahl, 2007. "Price setting in the euro area: some stylised facts from individual producer price data," Working Paper Series 727, European Central Bank. [Downloadable!]
    Other versions:
Statistics
Access and download statistics

Did you know? Authors registered on the RePEc Author Service receive monthly emails with details about downloads and abstract views of their works.

This page was last updated on 2009-11-20.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.